By now, you might be wondering if the central bankers have exhausted all the weapons in their arsenal. Money-printing and bond-buying, ZIRPs and NIRPs: What else could the smartest men and women in the room possibly employ? Well, in addition to doubling down on these unconventional policies that have failed to deliver substantial growth in Asia and Europe, the central banks have another trick up their sleeves: become traders on stock exchanges around the world.
Feed All the Bull You Can Bear
Since the global economic collapse, the European Central Bank (ECB) has been throwing everything at the wall to see what sticks. So far, the toxic concoction of quantitative easing (QE), subzero interest rates, and printing money has only exacerbated the problems facing the eurozone. With Christine Lagarde now at the helm, it has widely been expected she would employ even greater alternative policy instruments. Now we know what they could possibly be.
Madis Muller, governor of the Bank of Estonia and ECB policymaker, hinted that the institution could start acquiring stocks during the next recession. Recently speaking at an event hosted by the Bundesbank (Germany’s central bank) in Frankfurt, Muller revealed that the central bank might expand its asset-purchasing endeavors if the eurozone economy contracts since it is already “doing unconventional things.”
Muller told the crowd, without going too much detail, “You could – of course – imagine even more unconventional things if the situation gets really bad. [There] are ways to go beyond the government bonds, and a little bit of corporates and other assets that we are buying now.”
The ECB official did offer a word of caution for central banks: “Be aware of different side effects and think twice before you do something.”
For the last decade of interventionist monetary measures, the ECB has been scooping up billions of euros in bonds per month, putting together a balance sheet north of $3 trillion. Although QE came to an end in December 2018, former ECB head Mario Draghi relaunched it, which did garner the support of Lagarde. The ECB’s mantra now is growth at any cost, no matter how long it takes. Will this include inserting itself into financial markets and distorting stocks?
A Laughing Stock
Muller cited the Bank of Japan (BOJ), the Bank of Israel, and the Swiss National Bank (SNB) as institutions that have widened their stimulus efforts even more than the ECB. Tokyo, Jerusalem, and Zurich have purchased equities, such as stocks and exchange-traded funds (ETFs), at home and abroad.
The BOJ, for example, is poised to become the nation’s top shareholder of Tokyo Stock Exchange-listed companies next year as its holdings would rise from $55 billion to $400 billion. This would surpass the Government Pension Investment Fund’s TSE. The SNB possesses approximately $100 billion in stocks, including shares in Amazon, Apple, and Facebook. The Israeli bank owns about $3 billion in shares.
More central banks are expected to begin acquiring stocks or adding to their positions over the next two years, according to a June 2019 report by research group OMFIF. In total, central banks own roughly $1 trillion in equities, corporate bonds, foreign currency, and gold reserves. Despite the whopping figure, it still pales in comparison to the $80 trillion in outstanding equities.
The purpose? Either to stabilize markets or lift inflation to the target interest rate of 2%.
If you were wondering if such tactics influence markets, then you deserve a gold cigar, a crisp $5 bill, and a kiss from Rita Hayworth (or from Cary Grant). Liberty Nation has extensively documented how the unconventional policy tools of the central banks have warped the global bond industry. If they are distorting the bond arena, then common sense dictates that stocks also are being impacted.
Central banks, which are meant to be public venues, are embarking upon a quasi-nationalization crusade of businesses. Scooping up a tremendous number of shares in any given company offers an illusion to investors that a stock is hot – or lukewarm. In other words, central banks are rigging their own markets, so it might not be clear if the Nikkei, for instance, is sound and sustainable.
Traders should know better, but their confusion could be explained by one of two things. The first is that investors are easily distracted and possess short attention spans, obsessing about one story – until the next one comes along. The second issue is that they might be lying to themselves, trying to convince everyone else that things are in tiptop shape, which is evident during each bubble. There will always be institutional investors who go on television and proclaim that this time it is different.
Either way, central banks becoming major shareholders is bad news for global markets.
Pennies From Heaven
Leo Tolstoy wrote in The Death of Ivan Ilyich, “Everything by which you have lived and live now is all a deception, a lie, concealing both life and death from you.” Central banks are threatening the integrity of financial markets everywhere by unleashing a tsunami of Keynesian measures that are not even achieving any substantial growth. Even if they did, the long-term ramifications of debt and currency crises would remain ubiquitous. At least in Europe and Asia, nothing is what it seems – the public is being deceived by some of the most powerful institutions in the world. No force of nature and no act of God will stop the interventionism from happening.
Read more from Andrew Moran.